Tax Planning

Question 1

Marginal vs. Effective Rates

Answer 1

Marginal Tax Rate: The tax rate applied to the next marginal (incremental) portion of income earned.
Use marginal rate for considering new projects.

Effective Tax Rate: The tax rate actually paid on total income calculated by dividing total taxes paid by total income.

Question 2

Above-the-line vs. Below-the-line deductions

Answer 2

Above-the-line deductions are subtracted from your income before the adjusted gross income (AGI) is calculated for tax purposes.

Below-the-line deductions include any deduction reported on a line that comes after the AGI calculation on a return.

Question 3

What is the Self-Employment Tax Rate?

Answer 3

The self-employment tax rate is 15.3%.

6.20% for employee and 6.20% for employer = 12.40%
(old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Question 4

What is the deduction for self-employment tax

Answer 4

1/2 of the SE tax paid is deductible above the line

Question 5

What reduces your tax liability dollar for dollar?

Answer 5

Tax Credits

Question 6

What reduces your tax liability dollar for dollar?

Answer 6

Tax Credits

Question 6

What reduces your tax liability dollar for dollar?

Answer 6

Tax Credits

Question 6

Estimated Tax Payment Rules

Answer 6

AGI $150,000 or less, pay 100% of prior year tax or 90% of current year tax

More than $150,000 pay 110% of prior year tax or 90% of current year tax

Question 7

How are trusts taxed?

Answer 7

Undistributed distributable net income.

Question 8

What are Personal Exemptions

Answer 8

The amount of money that you could deduct for yourself, and for each of your dependents, on your tax return.

Suspended beginning 2018
Comes back after 2025

Question 9

What is the highest ordinary income tax rate?

Answer 9

37%

Question 10

What is the capital gain rate for collectibles?

Answer 10

28%

Question 11

What are the AMT rates?

Answer 11

26% and 28%

Question 12

What are the AMT rates?

Answer 12

26% and 28%

Question 13

What is Medicare Hospital Insurance Tax

Answer 13

0.9% on earned income above:
$250,000 MFJ
$200,000 Single

Question 14

What is Surtax on Net Investment Income

Answer 14

3.8% on certain net investment income when modified AGI is above:
$250,000 MFJ
$200,000 Single

Question 15

Uniform Gift to Minors Act (UGMA)

Answer 15

limited to transfer of certain assets
growth can be tax-free
ownership typically transfers to child at age 18

Question 16

Uniform Transfer to Minors Act (UTMA)

Answer 16

growth can be tax-free
allows a broader range of assets that can be donated
may be included in grantor’s taxable estate until child takes ownership which transfers from age 21-25

Question 17

Kiddie Tax Rules

Answer 17

Unearned income above $2,200 is Taxed at Parents Rate

SECURE Act changed taxation on for those dependents under 19 and full-time student from 19-23 years old to be taxed at the parent’s rate (like it was before TCJA).

Question 18

What is Bracket Stacking

Answer 18

Describes the strategy that seeks to allocate taxable income in different years or through different taxpayers to “fill up” lower tax rates in order to avoid taxation at higher rates.

Question 19

What is the AMT calculation?

Answer 19

(1) Taxable Income +/− AMT Adjustments + AMT Preference Items = AMTI (“AMT income”)
(2) AMTI − Exemption Amount (subject to phase out) = AMT Base

(3) AMT Base × AMT Rate(s) = Preliminary AMT
26% on first $199,900
28% on amounts above $199,900

4) Preliminary AMT – Tax Credits = Tentative AMT
(5) Tentative AMT − Regular Tax = AMT Due

Question 20

What is the AMT Exemption Amount

Answer 20

$114,600 for married filing jointly

Question 21

What is the AMT Exemption Phaseout Range (2021)

Answer 21

$1,047,200 - $1,505,600 for married filing jointly

Question 22

What is the AMT Exemption Phaseout Range (2021)

Answer 22

$1,047,200 - $1,505,600 for married filing jointly

Question 23

What are some AMT Planning opportunities?

Answer 23

Income and Expense Planning
– Defer deductions for state income or property taxes
– Defer or accelerate receipt of income
– Reduce exposure to private activity bonds
– Consider taxable bonds if subject to AMT
– Time charitable contributions

Stock and Option Planning
– Defer or accelerate receipt of capital gains
– Consider disqualifying disposition on ISOs
– Consider tandem exercise of ISOs and NSOs

Question 24

What are the percentage limitations for charitable contributions to a public charity

Answer 24

100% - FMV CASH
30% - LTCG Property unless election to deduct basis up to 50% of AGI
30% - Tangible Property IF THE CHARITY USES
50% - STCG or ordinary income property of the basis

Question 25

What are the percentage limitations for charitable contributions to a private foundation

Answer 25

30% - FMV CASH
20% - LTCG Basis unless qualified appreciated stock then FMV
20% - Tangible Property Basis
30% - STCG/ Ord. Income Basis

Question 26

Gift property with imbedded loss

Answer 26

General Rule: the taxpayer deducts the lesser of FMV or cost basis for gifts of depreciated assets

Result: the taxpayer deducts FMV on property that has lost value since purchase

Question 27

Holding period for common stock dividends to qualify for lower rates

Answer 27

to qualify for the lower rates, holding period for common stock is more than 60 days in the 121-day period beginning 60 days before the ex-dividend date.

Question 28

Holding period for preferred stock dividends to qualify for lower rates

Answer 28

Holding period for preferred stock is more than 90 days in the 181- day period beginning 90 days before the ex-dividend date.

Question 29

What are the wash sale rules?

Answer 29

A loss is disallowed if the taxpayer sells stock or securities, and within 30 days before or after that date (the 61-day period) the taxpayer acquires, or enters into a contract or option to acquire, substantially identical stock or securities.

When a loss is disallowed because of the wash sale rule, the disallowed loss is added to the cost basis of the new stock or securities

Question 30

How much capital loss can offset ordinary income?

Answer 30

$3,000

Question 31

When gains occur, the gains are __________.

Answer 31

Realized

Question 32

When gains trigger a taxable event, the gains are _____.

Answer 32

Recognized.

Question 33

What is the holding period requirement of ISO?

Answer 33

2 years

Question 34

What are the tax ramifications of ISO if holding period is met?

Answer 34

Grant – not a taxable event
Exercise – not a taxable event
Sale – taxation upon sale as appropriate

Question 35

What are the tax ramification if the holding period is not met?

Answer 35

Difference between FMV at time of exercise and the option price is considered ordinary income for tax purposes.

Question 36

What is the ISO spread?

Answer 36

the difference between the FMV of the stock on the date of exercise and the exercise price.

It is an AMT preference item

Question 37

What is the taxation of Non- Qualified Stock Options

Answer 37

Not taxed at time of grant.

NQSO are taxed as ordinary income at time of exercise.

Question 38

How is the basis of a partnership calculated?

Answer 38

Basis of partnership interest acquired by contribution of property to partnership is adjusted tax basis of contributed property. Basis of interest acquired by purchase generally equals amount of money and fair market value of other property paid for interest. Partner increases or decreases basis of his partnership interest annually by share of partnership tax items for year.

Question 39

Partnership basis is increased for what kind of debt

Answer 39

recourse and qualified recourse debt

Question 40

what debt increases an S corp basis?

Answer 40

Debt shareholder personally loaned to company

Question 41

what reflects the partner equity in the accounting records?

Answer 41

The capital account

Question 42

Loss deductions are also limited by the amount the taxpayer has ______.

Answer 42

at risk

Question 43

Losses from passive activities are deductible to the extent there is ________

Answer 43

passive income

Question 44

Section 1250

Answer 44

re-characterization of cap gains as ordinary income to recapture accelerated depreciation on certain real property

Question 45

Section 1231

Answer 45

depreciable and real property used in trade or business and held for more than one year are allowed cap gains treatment of gains and ordinary income treatment of losses

Question 46

Section 1244

Answer 46

certain small company stock allowed cap gains treatment and ordinary income treatment for losses

Question 47

Section 1244

Answer 47

certain small company stock allowed cap gains treatment and ordinary income treatment for losses